Steen Jakobsen
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Article / 24 June 2016 at 4:59 GMT

3 Numbers: US durable goods a factor when Brexit smoke clears

Blogger / MoreLiver's Daily
  • US durable goods subdued due to still cheap oil and expensive dollar
  • US consumer sentiment remains high, but inflation expectations very low
  • German IFO business climate – weak expectations but good current conditions

By Juhani Huopainen

Let’s face it – today is all about the Brexit referendum’s outcome. The official result will probably be announced around UK breakfast time on Friday, and the rest of the day will be dominated by investors adjusting to that decision.

While most of the reaction will have already happened overnight as votes were counted – especially if the result was relatively certain - I’d be very surprised if we did not experience volatile swings throughout the day.

Investors’ interest in today’s less-important economic data will likely remain limited. After the UK referendum is out of the way, the focus should get back to the Federal Reserve's and the European Central Bank's policy paths.

The ECB holds the first of its four scheduled TLTRO II-auctions today, but I will cover the ECB in an additional note later today.

Germany June IFO Business Climate (0800 GMT) The German business sentiment index is expected to have decreased a bit in June, from 107.7 in May to 107.5.

The fall in current conditions is expected to be smaller than the fall in expectations. As expectations is what drives investment and hiring, of course the decline would be a negative, but the Markit’s purchasing manager index released on Thursday showed that the German businesses didn’t seem to lose much of their optimism in June, despite the UK referendum and plethora of other risk events.

Source: Saxo Bank

With the current conditions-index being close to 2012-2016 highs, a possible slight decline from these levels would not be reason to worry.

US May Durable Goods Orders (1230). The headline manufacturing durable goods orders are expected to have declined by 0.6% in May.

The less volatile core orders on the other hand are seen to have increased by 0.2%, which would suggest a measly 0.4% increase from a year ago.

US durable
Source: Saxo Bank

As the monthly growth rate has on average remained positive, the yearly growth rate has slowly pushed above zero from negative territory.

Since the 5% decline seen in the second half of 2014, core orders have failed to grow at all for the past eighteen months. Two factors have hurt the durable goods orders: Cheaper oil and more expensive dollar.

 The Fed will have many excuses to tread very carefully on the rate hiking path. Photo: iStock

The oil price’s fall from $100/barrel to a low below $30/b really hurt manufacturing sector’s thirst for fixed investments. Even though the price of oil has now risen above $50/b, it is not enough – oil is just back to where it was in 2015.

The trade-weighted dollar index has declined from the last January’s high (which was the highest level since 2003). The index still remains 20% above the early 2014-levels.

A higher USD hurts manufacturing exports and thus decreases fixed investments and demand for durable goods.

US June U.Michigan Consumer Survey (1400). The end-of-the-month data is expected to show the consumer sentiment decline slightly to 94.0 from the mid-month estimate of 94.3 and 94.7 in May. 

The gyrations of the sentiment are not likely to spur much interest from the investors, but the survey’s inflation expectations are interesting.

Us sentiment
 Source: Saxo Bank
The most recent median expected price change over the next 12 months was 2.4% – the lowest since September 2010.

The five-year inflation forecast was also very low at 2.5%.

The Federal Reserve has mentioned the low inflation expectations, and while consumers are the last group that should be used as a source of macroeconomic forecasts, very low inflation expectations could transform into delayed consumer spending.

The Fed will have many excuses to tread very carefully on the rate hiking path.

-- Edited by Adam Courtenay

Juhani Huopainen is a blogger and a macro analyst at More Liver’s Daily. Follow Juhani or post your comment below to engage with Saxo Bank's social trading platform.


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